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Colony NorthStar execs detail troubles in multiple portfolios, platforms

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Colony NorthStar execs detail troubles in multiple portfolios, platforms

Colony NorthStar Inc. will not see the full benefits of the tri-party merger that formed the company for "at least a year or two," amid continued weakness in the company's asset management and healthcare and hospitality real estate portfolios, executives said.

The company, which formed in January 2017 from the combination of Colony Capital Inc., NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp., said in reporting 2017 earnings that it is cutting its quarterly dividend by 59% and engaging an adviser to help simplify its business.

Among the company's troubled business segments were healthcare real estate, in which the company is forecasting a same-store net operating income decrease of 3% across its 417 properties in 2018, and hospitality real estate, in which it is forecasting slim revenue growth.

Colony NorthStar plans to de-emphasize both property segments in favor of investments in U.S. industrial, global digital real estate infrastructure, and multifamily residential properties, among other areas, President and CEO Richard Saltzman said on the company's earnings call.

The company also expects to raise little retail capital in the near future from its business sponsoring alternative investment platforms, such as nontraded real estate investment trusts, Saltzman said.

While large competitors, including Blackstone Group LP and Starwood Capital Group, have successfully raised capital from retail investors through nontraded REITs, those investors have been "quite judicious and discriminating" — and have largely shunned Colony NorthStar's offerings, Saltzman added. As a result, the company is "pretty much 100% focused" on raising capital from institutional investors in 2018, he said.

In the call's question-and-answer period, JMP Securities analyst Mitch Germain asked Saltzman why the company did not foresee the fund-raising problems in the nontraded REIT business, which Germain said were evident even before Colony took on NorthStar's nontraded REIT platform in the tri-party merger.

While some challenges to the nontraded REIT industry, including regulatory changes, were predictable, "just exactly how it was going to play out was somewhat unclear," Saltzman said. "It's clearly gotten a lot worse. ... And this is not only idiosyncratic to us. This is an industry-wide phenomenon."

Blackstone's success — it raised more than $1.8 billion in 2017 through its nontraded REIT, Blackstone Real Estate Income Trust Inc., representing roughly 45% of market share — stemmed largely from its ability to sell shares through wire houses, a distribution channel that remains closed for most competitors, Saltzman said.

Another analyst, Jade Rahmani of Keefe Bruyette & Woods, noted that Colony Northstar had, at the time of the merger, set out a strategy of raising third-party capital for key property verticals, including hospitality and healthcare. Rahmani questioned whether that strategy would still appeal to would-be investors, given weakness in those segments, and asked whether the company should instead sell assets aggressively.

While Colony NorthStar does plan to sell assets, "We just have to be cautious around the data, just given the current market environment, some of the headwinds that we referenced we are experiencing in some of these spaces," Saltzman replied. "So it's not necessarily easily done in an instantaneous fashion."

Regarding the dividend cut, Saltzman noted that the company's previous payout was based on its predecessor entities' status as mortgage REITs, which generate higher short-term returns. As a result of the merger and shift toward equity investments, he said, "our cash flow profile has significantly shifted."